The Registered Provider stock rationalisation market remains active and whilst footprint disposals still dominate, rationalisation programmes are increasingly being driven by sophisticated modelling, risk management and pricing strategies. Over the last 18 months the market has seen the greatest volume of stock rationalisation activity to date. As the spate of mergers and consolidation in the sector continues, stock rationalisation programmes are likely to continue gathering pace.
On 30 May law firm Winckworth Sherwood and surveyors FFT hosted an exclusive roundtable dinner and discussion on stock rationalisation for 20 senior Registered Provider executives responsible for managing a combined stock of almost 500,000 across the UK.
A2 Dominion, Catalyst Housing, The Guinness Partnership, The Hyde Group, Karbon Homes, L&Q, Metropolitan, Notting Hill Genesis, PA Housing, Southern Housing, Sovereign and Stonewater, joined Winckworth Sherwood and FFT at The Shard in London to discuss the market and explore the drivers and changing nature of stock rationalisation programmes.
The stock rationalisation market is growing and maturing. Mergers, new entrants and changing board room strategies continue to shape and reform the way providers manage and develop new stock. Increasingly sophisticated methods of valuing stock based on worth are influencing pricing strategies going forward.
Strategy
Group level stock rationalisation programmes when adopted tend to be tailored towards the footprint approach. The approach is not particularly new, with some Registered Providers having been through several stock rationalisation rounds over the past seven or eight years. Others have only recently implemented their first geographical disposals.
There is broad consensus in a geographic methodology towards disposals with a desire to reduce stakeholder relationships to a meaningful and manageable level achieved by operating in a smaller number of local authority areas. There is also a desire to increase density to make operation activity more efficient, such as drive time between locations.
Strategic development opportunities may offset operational reasons, with some Registered Providers citing the need to diversify market risks associated with larger development pipelines across a wider geographic area.
The evaluation of operational efficiencies following disposal programmes remains a challenge for Registered Providers, particularly at individual scheme levels. Emerging mobile technologies will help provide more and better data.
Questions were raised over whether the market is ready for portfolios selected on a performance basis with concerns over being left with ‘bad stock’. The point was made that it is not always the absolute quality of stock, but the differential in what it is worth to the seller and buyer.
Risk
The majority of Registered Providers still preferred competitive disposals over swaps. Commercial and financial pressures still play a considerably larger role when bidding competitively for stock when compared against swaps.
Deal dynamics can change quickly leading to complex and time-consuming negotiations, yet a desire to get a deal ‘over the line’ almost always remains preferable to returning to square one, so transactions rarely abort.
Naturally, the smaller and easier to manage issues will quickly be resolved early on in negotiations, leaving the larger, stickier issues to be addressed as the deal draws to a head. This is, delegates agreed, not necessarily the best approach. A culture of compromise should be nurtured from the outset to encourage difficult issues to be resolved quickly and amicably. The better transactions were those where a seller was open and forthcoming about potential issues, rather than waiting for them to be discovered.
In relation to swap deals it is important to have a clear idea of what is going to be important from the outset and where compromises can be made. Swap deals need to be driven by strong personalities who have the authority to make decisions.
Risk profiling on disposals, acquisitions and swaps will routinely address reputational risk and regulator perception alongside financial risks. Wider market and customer perceptions increasingly high on boardroom agendas. Reputational risk and regulator perception is, at least for the time being, limiting sale of stock to operators outside of the sector although Registered Providers expect that to change gradually over time.
The concept of a deal toolkit for disposals and acquisitions based on past experience is being embraced by some of the more active Registered Providers. Such a toolkit, whether formalised or informal, sets out the expected due diligence requirements and the issues that might arise. This helps give corporate consistency across transactions and projects where different staff members and project teams may be involved.
Delegates still felt uncomfortable offering to warrant large amounts of information and felt they could improve their position through negotiation.
Pricing and strategy
Pricing of stock in the sector continues to vary widely. Some Registered Providers use sophisticated pricing models that take on many different scenarios and variables, including value to would be buyers and the latent value of the stock, whilst others continue to use overly simplistic approaches. This is driven by the varying demands of executives and boards, with some wanting just headline figures and others wanting to explore many different future scenarios.
A buyer should rationally only be prepared to pay a figure reflecting the worth of the stock to them, the concept of which is generally accepted amongst the principal Registered Providers active in the market, but not all. One issue to address is how this is calculated and then benchmarked against the traditional bases of valuation EUV-SH, MV-T and MV.
New valuation and pricing models are emerging and there was a clear desire amongst the attendees to learn and understand more. A new basis of valuation has recently been proposed to the sector – Market Value – Social Housing (MV-SH) – and valuers are stating the method will draw on comparable evidence of historical stock rationalisation transactions rather than being purely cash flow based. There was interesting debate around this proposal and the bank of evidence to be relied on as well as the purpose of the new basis will be used for. Commentators initially saw merit when considering pricing for stock swaps.
The rise of a number of Registered Providers focusing on specific products and tenures is also changing the pricing and marketing strategies of stock portfolios. Today, providers may find it easier to sell off specialist stock separately rather than working into a disposal an element that may not fit the buyer’s core focus.
One dilemma facing many providers is whether to sell to the various new entrants and for-profit Registered Providers. Current opinion and consensus on the evening showed a keen interest to know more about others’ transactional experiences balanced with slight nervousness to sell to these organisations and outside of the sector with the fear being predominantly reputational despite potentially higher pricing. As the number of non-traditional Registered Providers and investors in partnerships with providewrs increase and show interest in growth through acquisition of tenanted stock this will inevitably evolve.
Pricing and stock rationalisation strategies are inextricable linked. Historically, stock rationalisation was reactive and driven by opportunity. Today, rationalisation strategies are sophisticated and encompass geography, tenures, development objectives, local government administration together with service to residents. Mergers naturally trigger rationalisation programmes, as geographical stock concentrations are re-focussed.
Stock rationalisation strategies and programmes are now firm boardroom agendas for Registered Provider. Strategy and opportunity will continue to drive this market.
Will Rutter, Winckworth Sherwood and Stuart May and Rob Pratt, FFT